Despite intensifying competition from Mitsubishi’s Xpander and Wuling’s Confero, Astra’s 4W vehicle wholesales still increased MoM. YTD, its 8M17 4W vehicle wholesales grew 8.7% YoY, while its market share widened to 55.7% in 8M17 (8M16: 53.2%). Its motorcycle wholesales also improved in August (+4% MoM, +8% YoY). Going forward, we expect competition in the domestic 4W market to stay intense. SGMW is likely to launch a new medium-sized MPV – either with a 1.5L or 1.8L engine – which may compete with Toyota’s Avanza or Innova. However, the conglomerate’s robust heavy equipment sales and mining contracting business should partially offset its lower earnings from the auto division. Astra would benefit from the replacement cycle for heavy equipment as well. Premised on this, we maintain our BUY recommendation and IDR9,200 TP (18% upside), which implies 17x FY18F P/E.

For 2-Wheel (2W) vehicles, its wholesales for August increased to 419,000 units (+4% MoM, +8% YoY). In our calculation, its market share increased to 75.5% in August (July: 75%). We expect Astra to continue dominating the domestic 2W market, thanks to its strong products, distribution and net worth of its motorcycle financing business. (Andrey Wijaya)

We think the consensus still has not fully factored in the sizeable growth of United Tractors’ mining heavy equipment sales in FY18F-19F, due to the replacement cycle for such equipment coming into effect post the 2010- 2012 sales boom. Its heavy equipment sales margin should improve, as the industry is now in a seller’s market. Maintain BUY, with a new DCF-derived TP of IDR35,600 (from IDR32,900, 16% upside) implying 15.1x P/E on FY18F EPS. Our FY18F EPS is 12.8% higher than the consensus’. A consensus earnings estimate upgrade would be a share price catalyst.

Komatsu sales to the mining sector to keep growing in the coming years. We expect the sizeable increase in mining heavy equipment sales units in 2017 to continue until 2019, as mining heavy equipment sales – which went through a boom in 2010-2012 – has just entered the replacement cycle. Also, we believe Indonesia increasing its FY17 coal production target by 9.9% YoY to a peak of 474m tonnes would boost demand for mining heavy equipment.

After-sales revenue to increase in the coming years. The company’s after-sales revenue, ie spare parts sales and after-sales services revenue, should increase in the coming years as well, after the guarantee periods for new mining heavy equipment end. This should lift its revenue and profit margins, as after-sales services have lucrative profit margins – higher even than that derived from selling heavy equipment.

BUY, with a IDR35,600 TP. We fine-tune our assumptions on mining heavy equipment units and their profit margins and tweak our FY18F-19F earnings by 5.2-8.7% respectively. Our new DCF-derived TP of IDR35,600 (WACC:13.4%; LTG: 2%) also implies 15.1x and 13.2x P/Es on FY18F-19F EPS respectively. Reiterate BUY, as we think the consensus still has not factored in the sizeable increase in mining heavy equipment sales in 2018F- 2019F. Equipment purchased during the sales boom of 2010-2012 has a replacement cycle that starts in 2017 and ends in 2019. We think the improvement in monthly heavy equipment sales would be a share price catalyst for the near term.

QoQ, both Astra’s 4W and 2W vehicles 1Q17 wholesale came lower which we see this is likely due to lower sales discount. Notably, vehicles dealers commonly give more sales discount for inventories clearance at end of year.

Bank Permata’s FY16 losses are likely to slow group earnings growth. However, higher earnings from Astra’s automotive, agribusiness and heavy equipment units should partially offset the lower income from its financial units. We reduce our FY16F earnings but keep our FY17F forecast, as we expect its financial services arm to recover this year. In 2017, Astra should also benefit from improved consumer spending, as well as higher CPO and coal prices. Our SOP-based TP drops to IDR9,100 (from IDR9,250, 15% upside) implies 19x/16x FY17/18F P/Es. BUY.

Unexpected FY16 losses from Bank Permata. PT Bank Permata Tbk (Bank Permata) ($BNLI) – which is 44.6%-owned by Astra – surprisingly recorded a net loss of IDR6.5trn for FY16. This was driven by substantial new provision allocations for non-performing loans (NPL), which significantly increased in 4Q16. In 4Q16, the bank allocated IDR4.3trn in new provisions for allowances for impairment losses, which pressured FY16 earnings.

The increase in NPL was driven by loans to the manufacturing, agribusiness, wholesale & retail trading, as well as mining sectors. This year, we expect Bank Permata’s NPL to improve – especially for loans given to the agribusiness and mining sectors. These sectors are benefiting from the current increase in commodity prices, such as CPO, rubber and coal prices.

Tailwinds ahead. We see strong tailwinds for Astra’s mining, agribusiness and auto arms ahead, driven by:
i. Higher coal prices and slower growth of labour costs for its plantation unit, which may lift earnings;
ii. Its auto business is likely to maintain strong sales growth, boosted by lower financing costs;
iii. Hidden value in its property arm (just launched in Oct 2016) which may be unlocked once its assets start to be monetised.

In addition, in 2017, Bank Permata is likely to book lower new provisions for NPL. The bank’s allowances for its impairment losses coverage ratio increased to 75% at end-Dec 2016 (from 51% at end-Mar 2016).

Maintain BUY with a lower SOP-based TP of IDR9,100 (from IDR9,250, 15% upside) that also implies 19x/16x FY17F/FY18F P/Es respectively. While rising NPLs at Bank Permata are a key risk to our call, our sensitivity analysis indicates its impact on Astra’s value should not be significant. (Andrey Wijaya)

Yesterday, the Indonesia Business Competition Supervisory Commission (KPPU) announced its investigation result that Yamaha Indonesia Motor Manufacturing (YIMM) and Astra Honda Motor (AHM) are suspected of cartel practice. KPPU said that the two motorcycles makers have made "unwritten agreement" to control scooter's selling price in 2014.

We think United Tractors should be a good play to monetise the weakening IDR and coal price recovery. We opine that IDR is to weaken further to IDR13,700 in FY17 vs IDR13,290 YTD. Therefore, Pamapersada’s profit margins as the biggest contributor to consolidated earnings should expand. This is on the combination of the weakening IDR and mining contracting fee recovery. We also believe heavy equipment sales would increase. This is due to the sizable rise in customers’2017 capex for such equipment. Reiterate BUY with a higher IDR26,300 TP (from IDR24,700, 20% upside).

¨ Beneficiary of a weakening IDR. We opine that the strengthening USD should cause the IDR to weaken further and average at IDR13,700 in FY17 vs IDR13,290 YTD. The USD’s contribution to PT Pamapersada Nusantara’s (Pamapersada) revenue and costs is at 100% and 60% respectively. Its gross margins, the biggest contributor to United Tractors’ consolidated earnings, tend to expand when the IDR weakens (Figure 1). We expect Pamapersada’s gross margins to expand to 22% in FY17 on a weakening IDR and recovery in mining contracting fees. This is due to the recovery in coal prices.

¨ Heavy equipment sales to improve sizably in FY17. We did channel checks on Delta Dunia Makmur. Its subsidiary PT Bukit Makmur Mandiri Utama (Bukit Makmur) is Indonesia’s second-largest coal mining contractor. Bukit Makmurhas allocated a sizable USD180m capex for FY17 (FY15: USD55m) (Figure 4), which is mainly slated for the purchaseof heavy equipment. This is because Bukit Makmur wants to replace some portions of its mining contracting heavy equipment fleet. This should boost United Tractors’ Komatsu and Scania unit sales for the mining sector during this period.

¨ Reiterate BUY, with a higher IDR26,300 TP. We fine-tune our assumptions on the IDR to accommodate the view that the currency would weaken further. This results in higher FY16-18 EPS by 4.6-7.2%. We reiterate our BUY call with a higher DCF-derived IDR26,300 TP (WACC:12.2%, LTG:2%), which implies 14.8x P/E on our FY17F EPS (its 6-year mean P/E). The call is retained as we think its FY17 earnings recovery has still not been fully factored in by consensus and share price. Our FY17F EPS is 22.5% higher than consensus. We think revising up FY17F consensus earnings should boost share price.

¨ October’s operational performance keeps improving. Pamapersada keeps booking improving mining contracting volumes (Figure 5). Its October coal production grew 15.1%YoY (+10%MoM) due to the recovery in coal prices. We think the decrease in stripping ratio to 5.9x in October is just temporary. This is because coal companies are likely to increase their stripping ratios in FY17, based on our channel checks. United Tractors booked 218 Komatsu sales units (+207%YoY, +7.4%MoM), with the construction and agro sectors as the drivers of growth. (Hariyanto Wijaya, CFA, CFP, CA, CPA)

o Related to recently increasing coal price, BNLI stated that it is still too early to indicate the potential recovery in the mining sector’s NPL. If the coal price keep rising for the next 3-6 months, then it may give good indication for the NPL recovery.

· Most of the loan restructuring is through giving grace period

· BNLI plans to spin-off its sharia business by 2023 (Sharia loans contributed 9% of BNLI’s total loans).

o BNLI’s sharia business will implement branchless banking in 2017

· Fee based income grew significantly by 21% YoY in 9M16, supported by bancassurance business (Astra Aviva Life) and wealth management business

Astra International continued gaining market shares in which its 4W and 2W market shares increased to 60% in October (Sept: 59.9%) and 78.2% in Oct (Sept: 76.1%), respectively. Higher 4W market shares was driven by low cost green cars (LCGC) sales which increased by 7% MoM. In term of sales volume, Astra cars wholesales slightly declined to 55,197 units (-0.5% MoM), while that of motorcycles rose to 446,611 units (+5.5% MoM).

Astra International ($ASII) has only spent 9M16 capex of IDR7.3tn, -6% y-y,
which is equal to 50% of their full-year target capex totalling IDR14.5tn. Tira Ardianti, ASII Head of Investor
Relations, stated that the capex absorption depends on the on-going projects that the Company is
undertaking. (Bisnis Indonesia)

Sharp correction in JCI (down 4% on Friday) was mainly triggered by precipitous IDR weakening on external factors, while domestic macro improvements remain on track. We believe fundamentals still point to a resilient IDR, especially given Indonesia’s relatively high levels of growth among major EM economies. Consumer, pharmaceutical, poultry and high-end retailers would be at risk of IDR weakening, while commodities and heavy equipment players tend to benefit. High dividend yield stocks also offer protection in the current volatile market. Maintain LT positive view.

¨ Currency volatility is back on. Fears over potential Federal Reserve (Fed) rate hike resulted in IDR falling by up to 3% to IDR13,545/USD onFriday. Considerable IDR weakening could lead to higher production costs and potential cost overruns in certain infrastructure projects, which would lead to higher inflation and growth risks. Strong foreign fund inflows have also increased risks.

¨ Indonesia is still on track for macro improvement, in our view particularly with its rising forex reserve of USD115bn and potential influx of repatriated funds by end-2016. However, the weakening IDR is seen as the main spectre for investors and its occurrence could trigger a market melt-down due to panic selling, shifting focus away from real fundamentals. Thus, BI’s firm response and action would be critical in restoring stability and confidence, in our view. We opine that IDR volatility would still linger before it recovers to IDR13,200/USD by end-2016.

¨ Stronger fundamentals now. There have been several episodes of high IDR volatility, with the last one occurring during 2014-15, when IDR depreciated as much as 30% and JCI suffered 13% losses. In our view, the current situation is different especially given the positive macro environment, in contrast to the subdued economic situation during 2014-15,on BI’s tightening rate policy bias.

¨ BI is already in the market to stabilise the currency given considerable depreciation in IDR, and we view this intervention as plausible to show direction. Current account deficit also remains manageable at 2.1% in 9M16 (3Q16: 1.8%) vs peak of 4.3% in 2014.We expect IDR to weaken slightly to 13,600/USD by 3Q17 on the back of larger current account deficit and potential Fed rate hike.

¨ Resilient IDR. In summary, we opine that fundamentals point to a resilient IDR, underpinned by high yield differentials vs developed market (DM) economies and peers, relatively high levels of growth among major emerging market (EM) economies, and ongoing reforms. Domestic consumption and government-led infrastructure spending also continue to serve as supporting factors for economic growth improvements and we still expect the economy to grow at 5.3% in 2017.

¨ Impact of weakening IDR. IDR weakening would impact corporate earnings through operational currency mismatch and/or forex debt translation. Consumer, pharmaceutical, poultry and high-end retailers have high importation costs and would be at risk. Conversely, exporters such as commodities and heavy equipment players would tend to benefit. Companies with high USD debt would also be negatively impacted if IDR weakening continues.

¨ Higher mining contracting volume with higher mining fee. Mining contracting business is the main contributor to its consolidated earnings (51% of 9M16 consolidated gross profit). The management, who always give conservative guidance, guides its FY17F overburden volume and coal volume to grow by 10% YoY and 5% YoY respectively. The management thinks the FY17 strip ratio will increase and expects its mining contracting fee to recover in FY17F due to a lower discount on its mining contracting fee, which should improve the gross margin of its mining contracting business.

¨ Komatsu sales volume to recover with mining and construction as drivers. The management guides Komatsu sales to recover to 2,500 units in FY17F, which would be driven by demand from mining and construction sectors. Sales composition of big-size heavy equipment is expected to increase in FY17 due to higher demand from coal mining sector, which comes from medium to large coal miners. Currently, United Tractors has only a few big-sized heavy equipment items on its balance sheet and it takes around three months’ time from receiving order to deliver to its customers.

¨ Sales of spare parts to increase due to refurbishment cycle. Management describes that its spare part sales is on an increasing trend over the last two months, which was driven by resuming operation of some heavy mining equipment. Management estimates the refurbishment cycle of peak heavy equipment sales from 2011 should increase its spare part sales in FY17.

¨ Mining coal sales to increase to 7.5m tonnes in FY17F. as management guided for coal sales to increase to 7.5m tonnes. The volume increase comes from a ramp up in the production of its subsidiary, i.e. PT Asmin Bara Bronang.

¨ Unlikely to reverse impairment loss. Due to a slump in coal price until the beginning of 2016, United Tractors booked sizable impairment losses in 2014 and 2015. Based on our discussion with United Tractors, although coal price recovers, they are unlikely to reverse the impairment losses.

§ ASII average discount increases from 7.3% to 7.9% in September: Based on our channel checks, ASII’s discount increased from 7.3% in August to 7.9% in September (exhibits 11 and 12), mostly due to the Low MPV, Low SUV and LCGC models. In July, the Toyota Avanza was discounted by IDR16.5mn (8.1%), higher than the IDR15mn (8.1%) level in August. Toyota Innova also had a higher discount of IDR17mn (5.5%), compared to IDR10mn (3.5%) in August. As such, we expect the average 2016 discount level to hover around current levels.

Outlook: Stronger growth with ASII’s rising market share
In our view, the auto sector should benefit from Indonesia’s likely upcycle in 2017 GDP growth to 5.4% on: (1) higher purchasing power on lower interest rates, contained inflation and a stronger IDR; and (2) increased infrastructure projects, helped by tax receipts from the government’s tax amnesty program. The FSA also plans to boost the auto-sector demand by lowering the downpayment for vehicles from 20-25% to 5%. In 2017, we expect 4W sales volumes to reach 1.1mn units, +7% y-y. We expect ASII’s market share to improve from 50% in 2015 to 58% in 2017, backed by strong demand for its new models.

Recommendation: Maintain BUY on ASII, IMAS, and GJTL
Helped by lower interest rates and higher government spending ahead due to the tax amnesty, we expect the economy to improve, supporting demand for big-ticket items. Thus, ASII continues to be a BUY with an unchanged SOTP-based TP of IDR9,100 on higher sales volumes, market share and margins. On IMAS, we retain our BUY rating on 41% upside potential to our unchanged DCF-based IDR2,000 TP on severe ytd underperformance (exhibit 4). For GJTL, we also maintain our BUY rating with an unchanged DCF-based TP of IDR1,700. Risks to our stock calls: Lower margins (ASII), lower Datsun sales (IMAS) and weaker IDR (GJTL).

- Higher oil price will reduce fiscal deficit — The Indonesian government now expects incremental revenue from the recent bounce in oil price to ~US$50/bbl. Despite Indonesia is a net importer of oil & gas, fiscal deficit could decline by Rp0.1- 0.9trn based on government’s calculation for every US$1/bbl of oil price increase. The government is currently using an oil price of US$35/bbl in their 2016 proposed budget and thus with higher oil prices, they should receive additional revenue from the oil & gas sector.

- Gasoline being sold at c.US$50/bbl equivalent after taking into account the distribution margins of Pertamina — The current price of gasoline at Rp6,550/litre translates to c.US$48-50/bbl of oil prices. Thus the government is already at a comfortable level in terms of the selling prices of gasoline, and should see no pressure to increase the prices unless the oil prices were to increase to a higher level, say US$55-60/bbl. At Rp6,550/litre, Pertamina is making a distribution margin of Rp1,010/litre, as per government calculations (see Fig 1 for government’s detailed calculation of fuel prices).

- Non-subsidized fuel (RON97) in Malaysia is cheaper vs that in Indonesia — RON95 gasoline price in Indonesia (Rp8,250/litre) is +22% higher than RON97 price in Malaysia (Rp6,715/litre). The RON97 in Malaysia is a non-subsidize fuel while the RON95 is still being subsidized and sold at Rp5,575/litre.

- Tax amnesty is still on schedule to be passed in June 2016 — We see such an outcome as not being priced in by the market (see our recent Indonesian strategy note - Still Positive: Spotlight on Five Key Issues for Market). The parliament head of commission XI, Ahmadi Noor Supi, mentioned that tax amnesty bill will not get delayed since it is a critical part of the government’s 2016 budget revision. As per the government, they have included proceeds amounting to ~Rp103trn (US$7-8bn) from the tax amnesty bill in the 2016 revised budget.

- Maintain our positive view on the market — At a 1-year forward PER of 15.1x, the JCI is not cheap but nor does it look overly expensive, and we maintain our 5,700 target (+16%) set last October. Sector-wise, we continue to like property, construction and infra. $ASII rejoins our top picks and we see more value in banks as gainers from the expected passage of a tax amnesty bill. Top picks: $BBNI, $BBTN, $LPPF, $TLKM, $ASII, $MIKA, $PTPP, $ADHI, $BSDE, $CTRA, $PWON and $JSMR.

* ASII’s average discount rose from 7.2% in May to 7.5% in June: Based on our channel checks, ASII’s discount increased from 7.2% in May to 7.5% in June (exhibits 12 and 13), mostly due to LCGC and Low SUV models, and Toyota Avanza. In June, Toyota Avanza was discounted by IDR20mn (9.9%), higher than the IDR19mn (9.1%) in May. Toyota Agya carried a higher discount of IDR10mn (7.9%), compared to IDR8mn (6.3%) in May. Honda maintained its IDR8mn (3.9%) discount for Honda Mobilio. As such, we expect the average 2016 discount level to hover around current levels.

Outlook: Intense competition likely to persistDespite some short-term improvements, we expect current intense competition and discounts to persist in the medium term, especially as several brands will launch new products in 2017. On slow purchasing power growth ahead, we believe that 4W sales will only experience a 7% y-y CAGR in 2016-20 while 2W sales will likely grow just 2.5% y-y. In 2016, we expect 4W sales volume recovery to 1.08mn units, +7% y-y, and flat 2W sales volumes of 6.4mn units.

Recommendation: REDUCE ASII; HOLD GJTL & BUY IMAS We believe weak purchasing power and the government’s aggressive taxation drive, including tax amnesty, will continue to take a toll on big ticket items. For ASII, we maintain our REDUCE rating with SOTP-based 12M TP of IDR5,650 due to its adverse impact from dealership restructuring. We raise IMAS from Hold to BUY on 33% upside to our DCF-based TP of IDR2,000 on severe ytd underperformance (exhibit 4). However, we cut GJTL from Buy to HOLD as it has surpassed our DCF-based TP of IDR860. Risks: Higher margins ($ASII), lower Datsun sales ($IMAS), and weaker/stronger IDR ($GJTL).

Competition in 7-seater LCGC to Intensify as Astra and SGM-Wuling Join the FrayAstra International ($ASII)

· Astra will introduce 7-seater LCGC in July – As we have highlighted several times, Astra is on schedule for a July introduction of Toyota Calya, a 7-seater LCGC. Currently, Datsun Go+ is the only LCGC offering a 7-seater. Thus we believe Astra will gain some market share with the introduction of Toyota Calya. Currently LCGCs account for c. 13% of total national volume and 20% of Astra's 4W volume.

· SAIC-Wuling to introduce 2 LCGCs in 2H17 following plant completion in July 2017 – The US$700m manufacturing facility in Bekasi has reached 50% completion and Baojun 730 and Wuling Hongguang will be introduced shortly after completion of the plant (capacity of 150k units/year). Both are 7-seaters in LCGC categories and they will be priced at around US$5,000/unit, lower than the cheapest LCGC which is currently priced at US$7,520/unit.

· SGM-Wuling is currently the only Chinese player making significant investments – Their plant is located in Kota Deltamas with production facilities over 60 hectares and they expect to build more than 50 dealerships, spare parts and maintenance service centers across Indonesia over the next two years with the majority located in the greater Jakarta area. They have introduced both Baojun and Hongguang in China and both have been selling well. SGM-Wuling sold 882k cars in 5M16, more than double the Indonesian car volume.

· We expect better 4W and 2W numbers in 2H16 following tax amnesty implementation – We believe a tax amnesty should boost 4W and 2W sales as buyers will no longer hesitate to purchase 4W while improvement in GDP growth should help 2W sales. The introduction of a 7-seater LCGC for Astra should be seen as a positive catalyst and we maintain our Buy call on the stock. SGM-Wuling will be a serious competitor in LCGC, but more so from 2018.

Astra Agro just announced the exercise price and the number of new shares for its rights issue, which we think should eliminate the overhang in its share price. It would do rights issue with the ratio of nine old: two new shares with an exercise price of IDR11,425, which would dilute its FY16F and FY17F EPS by 9% and 16% respectively. Cum-rights date is 6 Jun 2016. We reiterate our BUY call with a lower IDR17,800 TP on Astra Agro, which we view as a laggard play. Our revised TP is based on an unchanged 16.4x P/E target on diluted FY16F EPS.

· Despite the MoM decline in industry wholesale figure in April, Astra’s sales were up 2.5% MoM increasing its market share by 7% MoM to 56%.

· The main reason for the Astra’s market-share increase in April was because of inventory sell-down, especially by Honda. It looked like to us that Honda was too confident in the recovery in the retail sales, which were not seen in April. Due to the high inventory, our quick channel checks suggest that one can get discount of ~IDR25m for the Honda Mobilio model. The HRV model, which looked very strong in terms of demand (customers used to wait for 3-4 month), now is ready stock with improved features in accessories (bigger screen size for car tape) and also discount of ~IDR10m.

· We forecast recovery to start in May when we approach fasting month and Hari Raya..

We think that this is now an opportune time to BUY (upgrading from Neutral). During our Hong Kong marketing rounds, we were frequently asked about the timing to accumulate Astra Agro’s stock. Our TP rises to IDR19,500 TP (from IDR14,850, 21% upside), as we think Astra Agro is a laggard play in the plantation sector. We think it should outperform when the completion of its rights issue eliminates the overhang. Its 1Q16 performance was in line with our/consensus expectations.

¨ Now is the right time to accumulate Astra Agro. During our marketing visit to Hong Kong in April, we were frequently asked about the timing to accumulate Astra Agro Lestari (Astra Agro). Its share price has been lagging (+1.6% YTD vs Jakarta Agri Index: +5.2% YTD and JCI: +5.4% YTD), which we attribute to an overhang arising from its rights issue. We think that it is now a good time to accumulate the counter, as it has disclosed details of its rights issue. For conservative investors, we suggest accumulating shares after the exercise price of its rights issue is announced, ie late May 2016.

¨ Upgrade to BUY with higher IDR19,500 TP. As we think Astra Agro is a laggard plantation sector play, we upgrade our call, with new TP based on a higher target P/E of 16.4x FY16F EPS (its 10-year mean P/E, and from 12.5x). This implies EV/ha of USD12,500, which is within the range of Indonesia-listed planters of USD8,100-26,000. We maintain our assumptions and have not factored the dilution impact of the rights issue into our forecasts. The key risk to our BUY call would be weakening CPO prices.

¨ A 15% discount rate in our rights issue analysis. To get the exercise price in Indonesian rights issues, the average discount to market share price is around 16%. We assume Astra Agro would use a 15% discount for its current rights issue (Figure 4).

¨ In this scenario, its exercise price would be IDR13,685 and its theoretical ex-rights price (TERP) would be IDR15,722, while EPS should be diluted by 7.1% for FY16F and 13.3% for FY17F.

¨ Full-year earnings should be strong. We expect the company to book strong earnings for the current quarter, due to a spike in domestic CPO prices since end-March (average 1Q16 CPO price: IDR6,593/kg vs average price in April: IDR8,630/kg). For every IDR100/kg increase in the domestic CPO price, we expect earnings to increase by 3.9%.

Upgrade Astra to BUY (from Neutral) with higher SOP-based IDR7,400 TP (from IDR6,800, 12% upside) driven by a higher valuation of its agribusiness. Clearer details of its rights issue have been released, which should eliminate its overhang. The accelerated vehicle monthly sales, expected to recover in 2H16, is also a catalyst for its auto earnings. Negative news, such as lower mining contractors’ fee and higher NPLs, have likely been priced in since its share price fell 15% in the last two weeks. It is trading at an attractive -1SD of its 5-year mean forward P/E.

¨ Clearer details of Agri’s rights issue should eliminate its overhang. Since Astra Agro Lestari (Agri) (AALI, BUY, TP: IDR19,500) has disclosed more details of its rights issue – including June 2016 as targeted completion month – we see the overhang on its value to be eliminated. The exercise price of its rights issue should be announced late May, which would be a catalyst for Agri’s share price increase. In addition, we expect Agri to book strong earnings for the current quarter, due to a spike in the domestic CPO price since end-March (average 1Q16 CPO price: IDR6,593/kg vs average price in April: IDR8,630/kg).

¨ Expect better vehicle sales in 2H16. Lower financing costs, as well higher consumer spending should boost both four-wheel (4W) and two-wheel (2W) vehicles sales. New Toyota models – such as the All New Sienta, All New Kijang Innova and All New Fortuner – should increase 4W monthly sales. In addition, finance companies have started lowering their lending rates at end March 2016 – which should provide an additional engine for sales growth. 2W sales growth would be driven by the higher low-end consumer income – which has been boosted by higher CPO price. Notably, last year’s lower YoY 2W sales were attributed to a decline in sales in Kalimantan and Sumatra – where their main income sources are derived from commodities.

¨ Fine tune earnings estimates. Following Astra International’s (Astra) dissapointing 1Q16 earnings, we adjust its FY16-17 earnings estimates to IDR18trn/19trn (-6%/-6%) on the back of lower auto earnings following the implementation of the restructuring of a two-tiered distribution model, effective 1Q16. Our adjustment also includes the lower mining contractors’ earnings impacted by the lower contractors’ fees. We also raise uncollectible receivables (bad-debts) expenses for its financing companies.

¨ Upgrade to BUY, higher TP. We raise our SOP-based TP to IDR7,400 (from IDR6,800), driven by a higher valuation of Agri. We believe that the overhang caused by its rights issue would be eliminated soon. In addition, the accelerated vehicles monthly sales volume would be a catalyst for its auto earnings. Negative news – such as lower mining contractors’ fee and non-performing loans (NPLs) – has likely been priced in since the share price has fallen by c.15% in last two weeks. Astra is now trading at an attractive valuation -1SD of its 5-year average rolling forward P/E. Key risks to our call include weak consumer spending and the depreciating IDR vs USD.

- Higher discounts in April: Based on our channel checks, we are seeing higher discounts across the board in April compared to March (exhibits 13 and 14). In April, the Toyota Avanza is being discounted by IDR17mn (8.4%), higher than the IDR15mn (7.4%) level in March. Daihatsu Xenia is being discounted by even more at IDR20mn (11.1%). There is currently an IIMS 2016 exhibition (7-17 April), which could push up discounts as well. However, we expect the average 2016 discount level to hover around the current level, slightly lower compared to last year.

Outlook: Intense competition likely to persist Despite some short-term improvement, we expect the intense competition and resulting discounts to persist in the medium term, especially as several brands will be launched in the market in 2017. Given the longer-term GDP growth of 5.2%, we believe that the Indonesia auto sector will experience a CAGR of only 7% in 2016-20 compared to 15% y-y in the commodity boom years (2007-2013). 2W sales will likely grow just 3% y-y during that period. However, for 2016, we expect a gradual 4W sales volume recovery to 1.08mn units, +7% y-y and flat 2W sales volumes of 6.4mn units.

Recommendation: Neutral with Reduce ASII, Hold IMAS & GJTL The sector has outperformed the market (exhibit 4) due to the expectation of a higher GDP growth, interest rate cut and stronger IDR. At this stage, we upgrade our sector rating from Underweight to Neutral as we believe that auto sales had bottomed out in 2015. However, we believe that weak commodity prices will negatively affect purchasing power ahead. For ASII, even though we raise our SOTP-based TP from IDR5,450 to IDR6,450, we maintain our REDUCE rating as the stock has rallied above its fundamental value. For IMAS, we reiterate our HOLD rating and DCF-based TP of IDR2,000 on continued weak prospects. On GJTL, we cut our rating from BUY to HOLD with unchanged DCF-based TP of IDR740, as the share price almost reached our TP. Risks: higher margins (ASII), increased Datsun sales (IMAS), and a weaker IDR (GJTL).

Positive signals: 1Q16 4W retail sales stood at 262.2k units, +2% yoy. Toyota is still leading 1Q16’s 4W retail sales growth at +15% yoy (85.6k units), followed by Honda at +10% yoy (50.0k units), and Daihatsu at +2% yoy (42.3k units). We highlight that Toyota’s 1Q16 retail market share improved to 33% vs. 1Q15 at 29% due to deliveries of the new Kijang Innova and Fortuner. We believe that 4W wholesales volume will start to pick up if strong retail volumes persist over the next few months, indicating recovery of consumer confidence and purchasing power.

Fortuner on high demand. While Innova sales have normalized at 4-5k units per month, the new Fortuner is still highly demanded as sales are still above Toyota’s target of 1.5-2k units per month. Based on our channel checks, the waiting time for the a diesel Fortuner is approximately 3 months, while the waiting time for a gasoline Fortuner is approximately 1 month. Just like the Innova, we expect Fortuner sales to normalize within 3-4 months post its initial launch. Our channel checks with dealers indicate that discounts for the Toyota Avanza vary around 7-8%, while discounts for the Kijang Innova vary around 2-3.5%, meanwhile, no discounts are offered for the new Fortuner.

Expect turn around in 2H16. We continue to anticipate pick up in 4W volumes in 2H16 on the back of realization of infrastructure spending, rebound in CPO prices, lower interest rates (3x25 bps BI rate cut), fuel price cuts (effective April 1, 2016: gasoline Rp6,450/liter and diesel Rp5,150/liter), and recovery of consumer confidence. Maintain BUY with TP of Rp8,000 and trading at FY16 P/E of16.2 x.

We downgrade our call to NEUTRAL (from Buy) on Astra International as there could likely be an overhang on Astra’s subsidiary Astra Agro’s share price during its rights issuance process, which might be completed in early 2017. We cut our earnings estimates on the back of lower CPO sales volume and higher plantation costs. We also trim our SOP-based TP to IDR6,800 (from IDR7,300, 6% downside), implying 14-13x FY16F-17F P/Es. Meanwhile, wholesales of vehicles improved MoM in February, but it was still slightly below expectations.

¨ A likely overhang on Astra Agro Lestari (Astra Agro) ($AALI). We think that the rights issuance of Astra International’s (Astra) agribusiness arm may create an overhang on Astra Agro Lestari’s share price until it is completed – which is likely to be early next year. All rights issuance proceeds would be used to settle its existing low-interest debts which, given the cost of equity being more expensive than its cost of debts, would increase Astra Agro’s weighted average cost of capital (WACC).

¨ Despite a MoM improvement, February sales were below estimates. Astra’s vehicles sales improved MoM in February. Four-wheel (4W) vehicle wholesales increased to 41,500 units (+4.6% MoM), while two-wheels (2W) vehicle wholesales rose to 362,200 units (+25.9% MoM). However, it was slightly lower than our expectations, in which 2M16 sales were merely around 14% of our full-year estimate. On a YoY basis, both Astra 4W and 2W vehicles wholesales declined, in addition to the fact that the company is losing its 4W vehicle market share due to rising competition, especially from Honda, which aggresively launched attractive new models. For 2W vehicles, Astra’s market share increased to 68.5% (from 67.7% in 2M15) – which is in line with our expectation.

¨ Paring down earnings estimates and TP. We cut our FY16F/FY17F earnings for Astra to IDR19trn/IDR23trn (-4%/-11%) respectively, driven by lower earnings estimates on its agribusiness. We also cut our agribusiness earnings estimates on the back of lower CPO sales volume, as well as a higher plantation cost per hectare. We trim our SOP-based TP to IDR6,800 (from IDR7,300) – which implies a 6% downside – driven by the de-rating on the valuation of Astra’s agribusiness.

§ 4W: -0.6% y-y; 2W: -5.6% y-y: Based on sales figures (exhibits 5 and 6) released by Gaikindo (4W association) and AISI (2W association), February 2016 4W sales reached 88k units, -0.6% y-y, but +3.8% m-m, in line with our expectation of unexciting demand. For 2W, February sales reached 525k units, -5.6% y-y but +26% m-m, in line with our expectation of weak demand from the outer Java area due to unsupportive commodity prices.

§ ASII market share flat: In February, ASII's market share reached 47.0% (Jan-16: 46.6%; Feb-15: 49.0%) with monthly sales of 41.5k units, -4.7% y-y but +4.6% m-m. Despite support from the new Innova and new Fortuner, sales of Avanza were disappointing compared to last year. Nissan booked monthly sales of 1.8k units, -47% y-y but +31% m-m. Honda booked strong February sales of 19k units, +35% y-y but -5% m-m, due to its new model, the Honda BRV.

§ Flat to slightly lower discounts in March: Based on our channel checks, we are seeing flat to slightly lower discounts across the board in March compared to February (exhibits 11 and 12). In March, the Toyota Avanza is being discounted by IDR15mn (7.4%), slightly lower than the IDR16mn (8.4%) level in February, while the Daihatsu Xenia is being discounted by IDR15mn (8.4%), similar to the February level. We expect the discount level to hover around the current level, slightly lower than last year’s level.

Outlook: Margins likely to remain unexciting on intense competition This fight for market share is likely to be exacerbated by continued soft farmer incomes due to low commodity prices, with some purchasing power recovery only likely to materialize in 2H16. Thus, we expect margins to remain unexciting despite a low 2015 base. On volume, we forecast flat 2016 domestic sales of 1.02mn units for 4W and 6.4mn units for 2W, despite lower interest rates and gasoline prices. That said, we expect intense competition and weak demand to result in flat market shares at best for both $ASII and $IMAS.

Recommendation: REDUCE $ASII; HOLD $IMAS; BUY $GJTLAt this stage of the market cycle, we retain our UNDERWEIGHT call on the Indonesia automotive sector on a likely fight for market share and due to limited purchasing power growth on a weak commodity price trend. For $ASII, unexciting earnings prospects have us maintaining our REDUCE rating and SOTP-based 12M TP of IDR5,550. For $IMAS, we retain our HOLD rating as the current price is approaching our DCF-based TP of IDR2,000. For $GJTL, we retain our BUY rating and DCF-based TP of IDR860 on expected improved performance. Risks to our calls are higher revenue and margins for $ASII, higher or lower auto sales for $IMAS and a weaker IDR and margin for $GJTL.

3) Auto the only bright spot – Auto was one of the bright spots in the group, with encouraging growth in 4Q15 core earnings (+10% qoq). Positives last quarter included sequential improvement in auto dealership margins and improving performance (auto profits gained 14% qoq). Operating margin improved to 1.5% last quarter, but remains well below previous cycle average.

4) Sell rating maintained - Despite the improvement in the auto segment, overall group’s earnings visibility remains poor with drag from non-auto businesses. Apart from the credit deterioration in its financial business, we would also monitor for more concrete monthly auto demand trends improvement in the meantime, following the disappointing January volume numbers where 4-wheelers and 2- wheelers declined 10% and 17% respectively. Potential re-rating catalysts include economic recovery which may improve outlook for auto sales momentum, easing competitive dynamics and stabilizing profitability trends within its main segments.

Reiterate BUY; EPS growth to resumeReiterate BUY on ASII with a SOTP-based TP of IDR7,500. Our TP suggests14x FY17F PER, lower than its four-year mean of 15x. Our SOTP-basedvaluation is supported by the strong EPS CAGR (2015-18) of 10%, drivenby earnings recovery in the automotive-related and plantation segments.

FY15 earnings hit by impairment chargeASII’s FY15 net profit of IDR14,464b fell 24.6% YoY and is 10.5% lowerthan our full-year forecast IDR16,158b, mainly due to a mining assetimpairment charge of IDR2,585b at United Tractors. If we take out theasset impairment, ASII’s net profit would have been IDR17,049b, 5.4%higher than our forecast.

FY15 not a good year, but not unexpectedLast year, earnings from all major divisions (automotive, financialservices, heavy equipment, and plantation) were down due to weakglobal and domestic economies. However, we believe, this situation hasbeen factored into the share price, which has recovered from its lowestlevel in mid-Oct last year. In terms of earnings contribution, theautomotive segment remained the largest contributor (52%), followed byfinancial services (25%), heavy equipment (16%), plantation (3%), andothers (4%).

FY16 outlook betterWe forecast FY16 earnings to grow 11% YoY (excl. asset impairment in2015) to IDR18,930b on higher volumes and profit margins in theautomotive segment, and improving profits in the plantation segment.We have seen some macro improvements YTD, i.e. lower policy rates andmanageable inflation, which should be positive for earnings. The risksare mainly in the heavy equipment segment, as the coal market remainsweak.

In January, Indonesia’s domestic 4W vehicle wholesales declined 9.9%YoY while 2W vehicle wholesales fell 17.2% YoY. MoM, Astra lost marketshare in 4W vehicle sales, but gained in the 2W market. Still, we think thatweak January sales do not represent its full-year performance, as weexpect it to record a recovery in the second half of the year. We lift ourSOP-based TP to IDR7,300 (8% upside), implying 15x/13x FY16F/FY17FP/Es. A key risk is rising competition, especially in the low MPV segment.

Weak January sales do not represent full-year sales. Indonesia AutoIndustry Association (Gaikindo) reported that January domestic four-wheel (4W)vehicles whole sales declined to 84,900 units. Meanwhile, according to theIndonesia Motorcycle Industry Association (AISI), two-wheel (2W) vehiclewholesales fell to 416,300 units. Astra International’s (Astra) vehicle wholesaleswere also weak, in line with that of the national sales trend. MoM, it lost marketshare in 4W vehicles which declined to 46.7% in Jan 2016 but grew its 2Wmarket share to 69.1% in the same period.

Expect better sales ahead. We expect 4W vehicle wholesales to grow 7.5%YoY this year. We estimate the monthly sales volume at around 85,000 units, iethe same as the monthly sales average in the second half of last year.However, it should improve to around 95,000 units, driven by a further cut in theBI rate in the second half of the year. As 1Q14-1Q15 domestic monthly salesaveraged around 95,000-100,000 units, we think our monthly sales estimatesare quite reasonable.

Still NEUTRAL, but with a higher TP. We changed our valuation methodologyto SOP (from target P/E) as SOP better reflects the valuations of Astra’sdifferent divisions. We value its automotive division based on DCF and DDM,assuming a WACC of 10.2%, cost of equity of 14%, and terminal growth of 2%.Our new SOP-based TP of IDR7,300 (from IDR5,650) values Astra at 13xFY17F P/E, close to its 5-year average P/E.

Rising competition is a key risk. Rising competition in the industry is likely tocap Astra’s 4W wholesales growth. Competition in the low-multi-purposevehicle (MPV) segment – Astra’s best-selling cars – is likely to remain intense.In addition to competition from models made by existing manufacturers – suchas the Honda’s Mobilio, Suzuki’s Ertiga, and Nissan’s Livina – there is a newplayer joining the fray. SAIC-GM-Wuling (SGMW) plans to build a newmanufacturing facility with production capacity of 120,000 units pa (ie 6% ofnational capacity) near Jakarta. The SGMW plant is to start production of thelow-MPV in 2017.

- Astra Int'l (ASII) just announced a realignment of Toyota'sdistribution network across Indonesia. Toyota Astra Motor (TAM) will play a bigger role in the overall distribution vs Auto-2000 which currently controls most of the distribution.

- At the moment TAM distributes Toyota models to five main distributors; Auto-2000 being the biggest by far (see Figure 1). The sub-dealers (~300 of them) have to buy Toyota products from the main dealers. From 2016 sub-dealers will buy directly from TAM.

- We believe in the current slowdown, sub-dealers have not been profitable. Buying directly from TAM helps them save about 1-2% (margin kept by Auto-2000). On the other hand, it removes a potential conflict of interest where it is in Auto-2000's benefit that end customers buy from it, rather than the sub-dealers.

- We will await disclosure on the financial impact. However, initial estimate of the impact on ASII is not significant as the sales move from one part of ASII to another. Furthermore, Auto-2000 may be able to transfer some operational costs to TAM.

ASII: Early signs of improvement
Six specific catalysts investors should heed for Astra:
1) Purchase ahead of Idul Fitri holiday (Lebaran in July)
2) Increase in government spending
3) Indo Auto Show in August, automakers say this usually contributes 5-7% to annual sales.
4) Lower financing rate. BCA targeting 20% growth in auto loans in 2015
5) Potentially 10% higher LTV. Central bank has been entertaining relaxation of LTV for autos as well as mortgages by 10%. If so, LTV for 4W may be raised to 80% from current 70%.
6) New Product cycle. New Model of Innova tentatively out in Aug 2015, and new MPV actually in 2016.
We always like to look forward but present conditions must also make sense. Some noteworthy developments:
BCA saw a +35% MoM in new bookings for auto loans in April post lowering borrowing rate in the sector (~100bps in Feb 2015) – prove that this well-run bank can still dictate a few things when they said their mind to (has one of the lowest cost of funds in the market). (Sales Desk likes BBCA)
4W market share recovering?
Could Honda’s momentum be fading?
Myth that Astra financing very dependent on auto sales….is a myth. Growth in financing has actually surpassed 4W sales and earnings from financing is now 30% vs. 4W’s 23%. That means ASII’s financing business is taking market share from competitors.
Valuation reasonable – below market and again breaking 1std band vs. historical
In short, whilst the stock may not be a screaming buy because headwinds still persist, it is one we definitely need to monitor. The potential catalysts and early signs of improvements mentioned above translate to a solid thesis to buy Astra (ASII).

Astra reported weak 1Q15 results with net profit of Rp4.0trn, down 15% QoQ and 16% YoY and accounting for 19% of our and 20% of consensus' FY15 forecast, respectively. Operating profit reached Rp3.7trn, down 32% QoQ and 24% YoY and accounting for 17%/18% of Citi FY15E/consensus. Weak results were attributed to the weak profit on agribusiness (-75% QoQ and -80% YoY), infrastructure/logistics (-76% QoQ and -35% YoY) and automotive (-37% QoQ and -21% YoY). On the flipside, financial services (+26% QoQ and +21% YoY) and heavy equipment (+171% QoQ and +3% YoY) divisions reported decent results. Financial service and heavy equipment divisions now represent 30% and 25% of Astra’s net earnings in 1Q15 respectively.
- Automotive distribution operating margin reached 0.4% – Auto’s distribution operating margin continued to decline in 1Q15 to 0.4% from 1.5% in 4Q14 and 1.8% in 3Q14 (see Figure 1) due to weak 4W and 2W demand and intense competition in the 4W segment. This was the worst operating margin for more than 15 years. 4W and 2W volume fell 21% and 12% in 1Q15 respectively. We believe the 4W distribution margin may have reached negative territory.
-Contribution from equity income is -19% QoQ and -14% YoY – Equity income (mainly from manufacturing) reached Rp1.29trn, accounting for 18% of our FY15 forecast (see Fig. 1). This is due to weak performance across companies in equity income except for Bank Permata (+4-fold QoQ and 35% YoY). Equity income now contributes 32% of Astra International’s total net profit.
-Implications — We maintain our Neutral call on the stock as we believe that the outlook for the 4W segment will remain tough due to competition from Honda and Suzuki while CPO and coal prices remain in depressed territory. Catalysts will be 1) rebound in coal and CPO prices; 2) relaxation on the down payment requirement for auto financing and 3) less competition in the 4W segment. ASII

Indo Strategy - Positioning amidst slowest growth in a decade
Too early to bottom fish
The market sharp sell-down may appear excessive, yet we think it may be too early to be an aggressive buyer. The outlook of subdued growth outlook, probably a bit slower, broader and longer lasting than most envisaged, suggests it is still better to seek out stocks with relative earnings visibility. Indeed there is little indication to suggest this slowdown has stabilized thus far.
Broad based slowdown
Growth that was designed to slowdown in order to rein in CAD, e.g. BI allowing Rp to weaken for an essentially dollarized economy, has proven to be very potent. Weaker commodity prices along with the transition easing from the recent investment surge may well have contributed as well. Indeed, the recent earnings trend suggests a more pronounced and broad-based slowdown. This ranges from large ticket items to even basic consumer staples. Bellwether FMCGs that have already reported are showing that top-line growth running at a decade low pace (ex-GFC period); a reflection of weaker buying power and rising competition. Equally, we have also noticed an uptick in NPL though more toward the SME and micro segments. In addition, our channel checks across various industries, including bellwether consumer packaging, mostly reported a deteriorating environment.
Slower and longer?
Contrary to general expectations, we think it is premature to assume an economic recovery in 2H15. Indeed sub-5% growth for the year cannot be ruled out. Recently the capex trend suggests easing post the initial surge 3-4 years ago. That along with the job creation trend, easily half the pace seen in the past couple of years, is not supportive of any fast economic recovery in the second half. While we remain upbeat that the govt. infrastructure spending will be punchier into 2H, we think the direct economic impact would be muted. Indeed the more powerful multiplier effect will only be visible in the medium term. Indeed there is little indication to suggest this slowdown has already stabilized. As such, we believe stock picking toward earnings visibility and predictability will be key in this 'new normal'.
Macro improving vs Micro worsening - Market context
In balance, we think the market downside risk is limited; yet we think it may be too early to be an aggressive buyer. We think the macro environment is turning more positive, e.g. CAD possibly below BI's guidance of 1.6% in 1Q, along with easing inflation, etc. Politics too, seems to have stabilized, which should pave the way for the govt. to kick-start major infrastructure projects. Yet, faced with the possibly of the slowest growth in a decade (ex-GFC), along with flow favoring North Asia, we think stock picking towards better earnings visibility matters, notwithstanding the fact that initial sell-down tends to be indiscriminate. Within our DB Portfolio stocks, we think the following have high earnings visibility: BBCA and BBNI (Banks), TLKM (Telco), ICBP and KLBF (Consumer). Conversely, stocks that have done well in spite of worsening earnings fundamental such as ASII and UNTR appear more exposed.
$IHSG